South Africa’s finance minister, Enoch Godongwana, made an unprecedented move by cancelling the 2025 budget at the last minute, last week.
The reason behind the sudden decision was the minister’s failure to secure cabinet approval for a proposal to raise the value-added tax (VAT) from 15% to 17%.
VAT, the second largest contributor to the nation’s tax revenue after personal income tax, is a critical source of income for the government.
The proposed VAT increase has faced strong opposition from political parties within the African National Congress’s (ANC) government of national unity.
This coalition emerged after the ANC lost its majority in the June 2024 elections, and many of these parties are concerned about the impact of the VAT hike on already financially vulnerable South Africans.
The proposal would raise the cost of nearly all goods and services in the economy, excluding a few basic food items that are zero-rated, notes the Pietermaritzburg Economic Justice and Dignity Group.
Items such as food, toiletries, airtime, clothing, school supplies, and electricity would all experience an additional 17% charge. This would affect households and businesses alike, with significant consequences for affordability.
According to the latest data from PMBEJD, here’s how a 17% VAT rate would impact everyday costs:
–Basic Household Groceries: A 17% VAT hike would increase the cost of a basic grocery basket by R375.16, bringing the total to R5,477.84.
–Toiletries and Domestic Products: The VAT increase would raise the cost of a basic toiletries basket by R154.57, bringing the total to R1,063.82.
–Electricity: A household’s basic 350kWh electricity consumption would increase by R153.31, raising the total to R1,195.86 (this includes the 12.7% increase in electricity prices set to take effect in July).
The concerns surrounding this VAT proposal are rooted in its regressive nature, disproportionately affecting low-income households that are already struggling with debt, food insecurity, and financial strain.
Many South Africans are already underspending on basic needs, and for these households, an additional 2% VAT increase could worsen poverty, inequality, and the overall cost of living. It could also place further pressure on South Africa’s already strained social systems, including healthcare and education, the PMBEJD said.
Small businesses, which are already facing significant challenges, would also be hit hard by the VAT hike, it said.
The increase in the cost of goods and services would raise their operational costs, and many businesses may not be able to pass these increased costs onto consumers without losing their competitive edge. This could lead to reduced economic activity and productivity, especially in key sectors that rely on affordability for growth.
This proposed 2% VAT hike is expected to have a significant negative impact on South Africa’s economy, exacerbating socio-economic inequalities and potentially damaging growth prospects.
The rising cost of living would further burden households, particularly those already in precarious financial positions. There are concerns that such a policy could increase unemployment and deepen South Africa’s already severe unemployment crisis.
“We question that a proposal to increase the VAT-rate is well-considered. Is it the best revenue instrument to use right now given that the socio-economic situation of South Africans is so dire; which makes the expenditure costs to protect South Africans from the harm caused by raising VAT much higher; and the risk of a massive social fallout and economic slide more possible,” the PMBEJD said.
Given the risks associated with the proposed VAT increase, PMBEJD urges caution. Rather than raising VAT, the government could explore alternative sources of revenue that would have less impact on vulnerable communities and small businesses.
